Lower jobless rate reflects benefits end: Fed

By IBT Staff Reporter On 05/31/11 AT 4:41 PM

As much of a quarter of the recent decline in the U.S. jobless rate is due to long-term unemployment benefits running out, according to research from the Chicago Federal Reserve Bank published on Tuesday.

When people exhaust their benefits, the Chicago Fed study found, many find jobs or give up and leave the labor force altogether, both of which contribute to a decline in the unemployment rate.

Jobless benefits were extended to as long as 99 weeks under two federal programs created during the depths of the recent recession, up from the usual limit of 26 weeks. The extended benefits are thought to have kept some people from taking jobs they otherwise might have, boosting the unemployment rate, which peaked at 10.1 percent in October 2009.

About 10 percent to 25 percent of the decline in the unemployment rate from October 2009 to January 2011 can be attributed to the end of insurance benefits, the study said. Unemployment stood at 9 percent in January; it was also at 9 percent in the most recent April reading.

Prior studies have estimated that the extra benefits boosted the unemployment rate by as much as a full percentage point.

If the extended unemployment insurance programs are left intact, the exhaustion of benefits will have a limited and diminishing effect on the unemployment rate in coming months, according to the study, published in the latest Chicago Fed Letter.

But if labor market conditions continue to improve and the emergency benefits are eliminated, we would expect to see bigger effects on the unemployment rate (as many recently unemployed hit the 26-week limit).

For the study, please see http://www.chicagofed.org/digital_assets/publications/chicago_fed_letter/2011/cfljuly2011_288.pdf